Participating in Electronics GVC

09 May 2019

India’s expanding income levels have translated into a growing trade deficit, with imports of electronic products as a key component—electronics imports (under HS code 85) grew to $48.3 billion in 2017-18 (10% of total imports), jumping $10 billion over the previous year and at third rank in total imports after oil, and gems and jewellery. Spurring domestic manufacturing in electronics is thus the need of the hour.

While the Phased Manufacturing Programme (PMP), introduced in 2017, curbed imports under this category over 2018-19, India must build its electronics exports. A way of doing this is to effectively participate in global value chains (GVCs), where Asia has emerged as a major player. There are important takeaways from Vietnam, which expanded its electronics exports by over 700% between 2010 and 2016. A reason for Vietnam’s success is FDI by leading MNCs in the electronics sector. Over the past few decades, Vietnam liberalised its economy and instituted laws to protect investments. Huge swathes of coastal areas have been allocated to building economic zones and industrial parks. Corporate income tax has been slashed to 20% with additional financial and tax incentives, which, along with a sound ports and logistics infrastructure, have attracted major MNCs. These companies have further promoted growth of ancillary enterprises, creating a robust ecosystem that is now gaining from the movement of manufacturing out of China.

India’s strengths include a vast pool of engineers, competitive labour force, familiarity with English, and others. Many MNCs have set up design and R&D centres in the country, connected with manufacturing sectors. With the right policy environment, a thriving electronics sector well-integrated with shifting regional supply chains could help boost exports and create new jobs.

First, strategising imports of electronics in terms of final and intermediate items is important, as imports of certain products remain essential. Vietnam’s import bill in electronics at $47.7 billion in 2016 is testament to this. While India increased import duties on certain electronic products in the 2018-19 Budget, it recently exempted 35 machine parts used for manufacturing mobile phone components from basic customs duty to promote local handset production. A balance will need to be maintained on the import duty structures of such products.

Second, India needs to continue focus on easing the way business is done, especially in terms of trade across borders such as time and cost of border compliance, documentary compliance, etc, both for exports and imports. The time taken for border compliance of imports in India is more than five times that in Vietnam and the cost is almost 25% higher, as per the World Bank. Dedicated industrial parks could help develop a supportive trade system.

Third, GVCs demand high quality and on-time delivery, necessitating behind-the-border logistics support, with high-speed and reliable linking of industrial parks and ports. Equally, contract enforcement, recourse available to firms in case of violations, length of settlement periods, legal processes, etc, need to be considered.

Fourth, for upgrades within a GVC, backward linkages between MNCs and domestic industry are critical. India’s electronics SMEs need hand holding, both by the government and MNCs. Workshops by MNCs with suppliers including those at lower tiers could assist in building quality and meeting requisite standards. The government could also set up training centres for SMEs in key manufacturing clusters.

While Vietnam’s experience of attracting MNCs is a model, integration of its domestic firms into GVCs remains at low levels, mainly in assembly, packaging, etc. India must ensure that it reaches better value addition with deeper local supply chains. An advantage for India is that even if it were to integrate into the GVCs at a lower level initially, its strong private sector ecosystem, coupled with the large pool of talent and entrepreneurial spirit, can help the country rise within GVCs—initial integration is, however, critical.

The electronics market in India is projected to grow to $400 billion by 2020 and this, coupled with global demand for electronics, creates huge opportunities for firms to invest in India as a hub for exports. The PMP has contributed to lowering imports of handsets while imports of circuits and micro assemblies has concomitantly risen. Systematic government and industry interventions could create a fertile ground to enable development of the electronics sector.

Note: Published in Financial Express

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